I just wanted to create a new education step by step post on a recent trade Art of Trading private members completed and I'm sure many traders on Fintwit took too.
Today we will be looking at all aspects of the recent $AFRM momentum breakout and what made this technical trade such a fantastic setup! Power Earnings Gap, short interest, tightening price range, and news catalysts.
The first order of business was taking note of the recent Power Earnings Gap. Its not just as simple as buying the Power Earnings Gap and "hoping" for the best outcome. You must stalk the setup and wait for the trade to come to you.
Power Earnings Gap candles come in a variety of different qualities. Note the PEG candle in August of 2023 on the chart. A candle that opened and rallied higher the entire day, closing out strong! This is an A+ textbook example of a PEG. Now, the most recent PEG candle in November traded up high intraday but failed to close strong. It actually closed on lows. This is a poor example of a PEG. As a trader this means observing and waiting for the chart to develop over the coming days or weeks should be the strategy.
Over the week the setup did eventually develop. Not without some very large ups and downs. 15% - 20% moves were not uncommon, this marks the importance of stalking and observing, rather then a "buy and hope" approach. Then it settled, creating a narrow inside day candle.
What is an "Inside Day" candle?
Inside Days occur when the current days range trades inside the previous days range. Inside Days are commonly seen during consolidation and contraction periods. The pattern is neither bearish or bullish, but it can be a sign for big price moves to come.
Narrow range price action helps set the chart up for a trade. As price narrows and consolidates, the move that proceeds after often defines the next trend.
Eventually the bigger picture began to emerge. $AFRM built a mini Bull Flag pattern (pictured) slowly increasing the chances of a continuation move higher.
From a technical traders point of view here the stop loss sits at $24 and the breakout occurs at or around $25.50. An area to get "long"!
Now that, that's worked out lets look under the hood for potential catalyst that could help this trade along. I mentioned in the earlier tweet that this stock had "huge short interest" . I wrote about how to spot short squeezes in a previous education post here.
You can quickly look up short interest of any stock by visiting Finviz.com , searching the stock ticker and viewing the stats spreadsheet under the chart. Short float is what you're looking for! This is what it looks like here:
What is considered high short float %?
The higher the short float %, the more likely the stock has the potential for a short squeeze. The higher the percentage, the bigger the potential move or squeeze may be. In the case of a news catalyst or a technical catalyst that caused the stock to trade up, price movement higher could become rapid as part of the move would be attributed to "short covering". Large instutional funds create big volume fueling the squeeze rapidly!
I have a "Hot Pepper" Scale for this! --->
So what does this all mean for $AFRM? What was the potential catalyst, other then the bullish technical setup that could send this stock higher?
As we approached December and the holiday season, I figured the Christmas shopping theme would kick in. So big retailer stocks like $AMZN and the sector as a whole would have a good chance to outperform. With inflation driving prices up, people will be much more inclined to BNPL (Buy Now Pay Later). As we approached end of November, beginning of December, $AFRM bull flagging, chances were very high that this stock was ready to breakout!
To add to all of this we got a Adobe Analytics report that was published that directly mentioned a heavy increase in BNPL by shoppers which obvious favored $AFRM
So how did the Art of Trading trade $AFRM?
Based on all of the technical factors reviewed above we went long November 20th.
Entry was $25.62
Stop loss was $24.00
Target was $30.00
Here are the alert tweets sent to Art of Trading Members:
Patience was required while anticipating the move.
Upon the initial breakout higher we sold half of the trade at $28.02 on November 27th for roughly +10% gains!
We sold the second half on November 28th at $30.02 . Admittedly the second exit was a little premature but many factors must be considered after large scale moves. We made note of $AFRM erratic price behavior while studying the setup earlier. 15% - 20% moves aren't uncommon and I wasn't about to give up that move because of greed.
The trade in total produced a 13.27% return. On a $25k position that equates to $3317.72
I hope this step by step educational post helped you understand what goes on behind a trade like this! In short, strong technical characteristics, high short interest and anticipated catalysts can create explosive short term moves! $AFRM was the perfect candidate for such a trade!
Learn to spot and trade these setups and make them your very own!!!